Question

At the high level of activity in November, 12000 machine hours were run and power costs were $22000. In April, a month of low activity, 5000 machine hours were run and power costs amounted to $15000. Using the high-low method, the estimated fixed cost element of power costs is

Answer 1

The estimated fixed cost element of power costs is $10,000

Step-by-step explanation:

For computing the fixed cost first we have to calculate the variable cost per unit which is shown below:

= (High power cost - low power cost) ÷ (High machine hours - low machine hours)

= ($22,000 - $15,000) ÷ (12,000 - 5,000)

= $7,000 ÷ 7,000

= $1

Now the fixed cost would be

= (High power cost) - (high machine hours × variable cost per unit)

= $22,000 - 12,000 × $1

= $22,000 - $12,000

= $10,000